Week 27 Market Report

Last week’s activity rebounded with 186,343,300 shares traded as compared to the previous week’s 95,397,400 (+95%). Total turnover was Kshs. 5,470,987,365/= as compared to the slow preceding week’s Kshs. 2,333,878,879/= (+134%). The downward trend continues as the NSE 20 dipped to 3604.06 (-0.09%), the broad NASI to 152.24 (-0.44%) and the NSE 25 also moved down to 4011.78 (-1.49%). Election jitters have arisen in the foreign dominated market.

Banking Sector

Equity Bank Kshs. 37.25 (-1.32%) led the movers as a heavy 70,871,300 shares exchanged hands. Humungous block trades towards the end of the week led to these admirable volumes. On Thursday 06th July, over 68 million shares were traded in the single session. These large-scale purchases indicate strong confidence in the lender which is just a stroll away from its 52-week high of Kshs. 40.50/=. Equity Bank plans to have presence in 15 African countries in the next ten years. The bank is currently consolidating its presence in Kenya, Uganda, Tanzania, Rwanda, South Sudan and Democratic Republic of Congo.

Kenya’s largest Bank by market value recently revealed in its latest Annual Report that it acquired an additional 7 per cent in Congo’s Pro Credit Bank Limited at a cost of Sh 2.2 Billion (US$ 21 Million). The transaction took Equity’s shareholding in the Congo Business to 86 per cent, having acquired a controlling 79 per cent stake back in 2015. Equity Group Holdings Limited currently has eleven wholly owned subsidiary companies as of December, 2016 and one partially owned at 86% (Dr Congo). All the subsidiaries except Equity Bank Uganda Limited, Equity Bank (Rwanda) Limited, Equity Bank Tanzania Limited, Equity Bank Southern Sudan Limited and Pro Credit Bank are incorporated in Kenya. This gives its less reliance on the Kenyan banking industry which is weighed down by the rate cap law. It is +59% from its 52-week low of Kshs. 23.50/=.

KCB Group Kshs. 37.75/= (0.00%) remained unchanged, moving 6,253,800 shares. GCR retained the bank’s long-term credit rating at AA and short term at A1+. KCB’s total risk-weighted assets ratio dropped 17% in March 2017 from 18.1%, against a statutory floor of 14.5%. Core capital ratio (tier-one capital) eased to 14.1% from 17.1% against a 10.5% minimum. In the current environment of deflated earnings, investors are likely to look at ratings and outlooks. The lender posted the lowest drop in quarter 1 profits, among its peers. Net profit came in at Sh 4.54 billion versus Sh 4.63 billion in Q1 2016. Profit before tax fell to Sh 6.59 Billion compared to Sh 6.61 Billion posted in March 2016.

Co-operative Bank Kshs. 14/= (-17.40%) fell to previously anticipated levels after going ex-bonus, on heavy volume. The 1-for-5 bonus issue saw those who bought at the previous week’s closing price of Kshs. 16.95/=, left with an adjusted price of Kshs. 14.13/=. A rebound is expected as soon as supply runs out at these levels. Moody’s Investors Service (Moody’s) assigned first time B1/Not prime global local currency deposit ratings to the lender. Its strong loss-absorbing ability and liquidity protects the company from the more grievous effects of weakening asset quality.

CFC Stanbic Kshs. 74.50/= (+4.93%) saw the barter of 697,700 shares. The ticker is +28% from its 52-week low of Kshs. 58/=, which was set earlier this year. The rebranded lender reported a 9.24 percent drop to Sh1.08 billion in net profit for the first quarter of 2017. With a PE ratio of 6.66 (hopefully you are not superstitious), it looks capable of adding a bit of weight to market capitalisation.

Telecommunications Sector

Safaricom Kshs. 23/= (+1.10%) rebounded after its recent spell of increased profit taking. Dealing 63,012,600 shares during the week, demand increased substantially on Friday 7th July 2017, outdoing supply almost 3 times. The largest and most successful telecommunication company in East and Central Africa reported an increase of 27.1 percent in net income to a record Sh 48.4 Billion. A dividend hike of 27.5% to Kshs. 0.97/= is likely to lead to some serious price action towards its books closure of 1st September 2017. I expect the price to hit atleast Kshs. 25/= per share.

Commercial and Services

Kenya Airways Kshs. 4.95/= (-1.98%) retreated further on heavy volume of 1,518,300 shares. The loss-making airline is expected to float a discounted rights issue by the end of the year, albeit at a significant dilution.

The government and local lenders debt to equity conversion, now confirmed, will assist the troubled company to dig itself out of a negative equity position. Controlling solid equity rather than horrendous debt, despite dilution, is better and I certainly do hope that the debt to equity conversion is done at a significant premium to the current share price. This is not unlikely and appears to be a glimmer of hope for shareholders of the Pride of Africa. Furthermore, weakening oil prices and the aviation giant’s abstention from potentially damaging speculative jet fuel hedging contracts, is likely to allow it to price competitively without suffering operational losses due to speculation in the downward sloping oil market. Oil below $40 per barrel is possible.

Uchumi Supermarket Kshs. 2.25/= (+4.65%) traded 1,816,400 shares. The hole dug by the retailer’s consistent losses is likely to need more equity. I would exercise caution on the counter despite being only 12.5% from its 52-week low of Kshs. 2.00/= and still 48% less than its 52-week high of Kshs. 4.40/=. The loss-making supermarket chain saw recent strikes over unpaid May and June salaries. However, a return-to-work formula was promptly signed by the management but throws light over the group’s underlying problems, despite government bailouts.

Construction and Allied

Bamburi Cement Kshs. 190/= (+2.15%) traded 1,114,100 shares and set a new 52-week high of Kshs. 192/= in intra-day trade. The quality cement maker is set to increase its output by 1 million metric tonnes to 3.3 million metric tonnes. Kenya’s increased spending on infrastructure and development projects will spur demand for building materials but increased expansion by private cement makers such as Mombasa Cement Ltd., will also lead to the inevitable price wars. I am waiting for the day that we see a steel mill go public. This is long overdue.

Energy and Petroleum

KENGEN Kshs. 7.95 (0.00%) remained flat on heavy volume. The energy generator is in plans to sell electricity directly to large consumers. The Energy Bill that is currently in Parliament is unlikely to be passed before the new parliament takes shape after elections. However, CEO Albert Mugo has assured KPLC that they will keep off users already signed by the energy distributor and only target new large-scale clients.

KPLC Kshs. 8.15/= (+2.52%) traded moderately heavy volume as sellers held on. Demand built up towards the end of the week as investors anticipate strong results. Its half-year profit after tax increased by 11.399% to Kshs. 4.201b. However half year profit before tax decreased by 1.691% to Kshs. 5.640b. Reducing fuel costs caused by falling oil prices will have a positive impact on the utility monopoly’s bottom line.

Umeme Kshs. 12.30/= (-1.99%) set a new 52-week low on heavy volume. Its half year results are expected in Septemeber. In the half year results to 30th June 2016, net profit during the period dropped to Ushs 54.5 billion compared to Ushs 67.6 billion at 30 June 2015 (-19%). The decline was attributed to increased financing costs and a normalized tax rate. The effective tax rate at 30 June 2016 was 32.0% compared to 9.1% in the June 2015 conformed accounts. The company normally pays an interim dividend and with a previous decline in profitability, even a marginal increase will satisfy an investor’s growth appetite…

Insurance

Britam Kshs. 14.20/= (+12.25%) rebounded. Heavy volume moved hands during the week as for CIC Insurance Kshs 4.20/= (+2.44%).

Kenya Re Kshs. 19.90/= (-4.10%) saw 596,500 shares exchange hands. It is an attractive counter because it is backed by the government, which owns 60% of it and is set to enjoy a mandatory 20% cession up to 2020. Its 52-week low is Kshs. 17.50/=.

Investment and Investment Services

Centum Kshs. 41.50/= (0.00%) remained unchanged with a movement of 1,632,500 shares. Its books closure date for the Kshs. 1.20/= dividend is still not widely available news. Clarity on the same will benefit old and potential investors.

NSE Kshs. 16.85 (+0.90%) rebounded marginally on heavy volume. The share has a PE ratio of 23.73 implying investor confidence in the exchange, but also highlighting the risk of a potential downside in a bear market. It has a 52-week low of Kshs. 11/=, which was set this year during the last phases of the heart-breaking bear run.

Manufacturing and Allied

East African Breweries Kshs. 251/= (-3.09%) eased on volume of 740,000 shares. Its primary local competitor is illicit home-based brews and palm wines. However, the spirit manufacturer should definitely think of venturing into the palm wine market and popularising the village drink; in fact promoting it to the same level Japan promoted Saké. Innovation and ‘thinking out of the box’ is the key in these tough competitive times.

In a surprising show of stability, Mumias Kshs. 1.10 (0.00%) remained stable on heavy volume. Kakamega Governor Wycliffe Oparanya recently called for privatisation of the troubled sugar miller. He wants the government to relinquish its 20% ownership in favour of private investors and also increase the County Government’s involvement in the loss maker. He cites corruption as a significant contributor to the company’s woes. In my opinion, a strategic investor is the only way to save this soured sugar manufacturer.

By @MihrThakar